PPP Agent Fee and Applicant Litigation: An Update

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An article titled PPP Agent Fee and Applicant Litigation: An Update, by Amy Pritchard Williams, Callan G. Stein and Lauren H. Geiser, dated January 2021. The authors review Paycheck Protection Program litigation in two categories: agents seeking fees for assisting businesses that applied for PPP loans, and unsuccessful applicants for loans. The article states that by early August at least 60 agent-fee cases had been filed in 26 districts and that plaintiffs attempted unsuccessfully to consolidate them in a Multidistrict Litigation. It says the first two courts to address contested motions to dismiss, the Northern District of Florida and the Southern District of New York, dismissed the actions before them.

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Document type: 2021 01 Civic Research Ppp Agent Fee Applicant Litigation Update
Case: 2021 01 Civic Research Ppp Agent Fee Applicant Litigation Update

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“PPP Agent Fee and Applicant Litigation: An Update.” Original at www.civicresearchinstitute.com. Archived at Pandemic Darlings, https://pandemicdarlings.com/source-documents/2021-01-civic-research-ppp-agent-fee-applicant-litigation-update/, SHA-256 4fb3de569aab9c78a42ecc4a75e9c0dc06ae064ecd8250bbc67edfa3262f71e5.

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PPP AGENT FEE AND APPLICANT LITIGATION: AN UPDATE
The rushed roll out of the PPP and the size of the program have led to litigation across
the country, mainly in two categories: agents seeking fees for assisting businesses that
applied for PPP loans and unsuccessful applicants for loans. The authors review this
litigation, describing the claims made by plaintiffs and the negative district court
responses in the two cases that have been decided so far.

By Amy Pritchard Williams, Callan G. Stein and Lauren H. Geiser *

In response to the quickly deteriorating economic program.2 When the program closed on August 8, 2020,
conditions caused by the COVID-19 pandemic, $525 billion in loans had been approved and roughly
Congress expanded the Small Business Administration’s $124 billion in funding remained untapped.
7(a) Loan Program by creating the Paycheck Protection
Program (“PPP”) and authorized the SBA to guarantee However, not unsurprisingly, the rushed roll out of
100 percent of the PPP loans made by approved lenders the program and scramble for funds together with the
to qualifying businesses. Authorized pursuant to the sheer size of the program has led to litigation filed across
March 27 Coronavirus Aid, Relief, and Economic the country. The cases fall primarily into two categories:
Security Act (the “CARES Act”), loans under the PPP claims filed by agents claiming entitlement to fees for
program became available just a week after the CARES assisting businesses that applied for PPP loans3 and
Act became law. The SBA released four pages of claims filed by unsuccessful applicants. The lawsuits
general guidance on March 31 and an Interim Final Rule
(“IFR”) governing the program on April 2, the night ————————————————————
before applications opened. 2
The SBA’s PPP rules and guidance can be accessed at its
website. https://www.sba.gov/funding-programs/loans/
Businesses scrambled to apply for the $349 billion in coronavirus-relief-options/paycheck-protection-
initial funding, which ran out in just 13 days. Problems program#section-header-9.
with the program’s roll out were well publicized: the 3
A partial listing of these cases: In re: Paycheck Protection
CARES Act did not provide for any exceptions to the Program Agent Fees Litigation, MDL No. 2950; Sport & Wheat
Patriot Act’s Know Your Customer (“KYC”) v. Servisfirst Bank Inc. et al., No. 20-05425 (N.D. Fla); Tax
requirements, which led many lenders to restrict Divas LLC, et al, v. JPMorgan Chase Bank, case number 1:20-
applications to existing customers; the SBA’s cv-05311 (S.D.N.Y.); Bookmyer v. PNC Bank N.A. et al., No.
application approval system was quickly overwhelmed 2:20-cv-02284 (S.D. Ohio); David S. Lowry, CPA, Ltd., v. U.S.
by the crush of applications; and potential applicants Bancorp., et al., 1:20-cv-00348-MWM (S.D. Ohio); American
were confused by the program’s rules on loan Video Duplicating Inc. et al, v. Citibank N.A., et al, case number
forgiveness and repayment. The speed with which the 2:20-cv-03815 (C.D. Cal); M&M Consulting Group LLC v.
program was rolled out meant that the interim rules and JPMorgan Chase Bank NA et al., case number 8:20-cv-01318
other regulatory guidance from the SBA left many (C.D. Cal.); Ratliff CPA Firm, PC v. First-Citizens Bank &
questions unanswered. Trust Co., No. 20-cv-02041 (D.S.C. May 29, 2020);Compu-Tax
& Accounting, LLC v. Bank of America, N.A., No. 20-cv-01554
The Interim Final Rule (“IFR”), first released on (D. Ariz. Aug. 5, 2020); Profitwise Accounting Inc. v. Bank of
April 2, was published in the Federal Register on an America, N.A., No. 20-cv-01395 (S.D. Cal. July 22, 2020);
expedited basis on April 15, 2020.1 On April 24, 2020, Fisher, P.A. v. Bank of America, N.A., No. 20-cv-00405
Congress made an additional $310 billion in funding (W.D.N.C. July 21, 2020). Please note that between the time
available, and over the next few months the SBA issued this article was finalized for publication and the date of
additional and revised rules and guidance for the publication, there have been material developments in a number
———————————————————— of the aforementioned cases. For example, dispositive briefing
1
Business Loan Program Temporary Changes; Paycheck has been filed in American Video Duplicating, and Bookmyer
Protection Program, 85 Fed. Reg. 20,811 (Apr. 15, 2020). has been voluntarily dismissed.

January 2021 Page 13
filed by would-be borrowers in turn relate primarily to applicant, lender, and agent provide the SBA with a
allegations that lenders impermissibly added eligibility copy of a compensation agreement.8 The form required
conditions or were obligated to lend on a first-come, by the SBA is called the Form 159 Fee Disclosure and
first-served basis but did not. Compensation Agreement (“Form 159”). The pre-
existing regulations limited how much an agent can be
Now that we have the benefit of the first decisions paid prior to the creation of the PPP program, with limits
addressing the viability of these cases, this article based on the amount of loan and a requirement that
provides an update on the first wave of PPP litigation. compensation be reasonable.9

AGENT-FEE CASES With respect to agent fees, the CARES Act provides
that an agent assisting a PPP applicant “may not collect a
By early August, at least 60 agent-fee cases had been fee in excess of the limits established by the [SBA]
filed in 26 districts.4 Plaintiffs in these cases attempted Administrator.”10 The IFR (which temporarily
unsuccessfully to consolidate them in a Multidistrict supersedes any existing conflicting program
Litigation (“MDL”). As described by the Judicial Panel requirement)11 provides in part:
on Multidistrict Litigation’s decision declining to create
any MDLs, the cases all allege that “lenders across the Agent fees will be paid by the lender out of the
banking industry failed to pay legally mandated “agent fees the lender receives from SBA.12 Agents
fees” owed to agents.”5 However, the panel declined to may not collect fees from the borrower or be
create either an industry-wide or lender-specific MDL paid out of the PPP loan proceeds. The total
because there is no predominant defendant across all of amount that an agent may collect from the
the actions (indeed the panel noted that defendants lender for assistance in preparing an
ranged from large national banks to community and application for a PPP loan (including referral
regional lenders) and the actions lack sufficient common to the lender) may not exceed . . . a percentage
fact questions because each lender has its own practices of the loan amount ranging from one percent
and policies for paying agent fees. for loans of $350,000 or less to .25 percent for
loans of $2 million or more.13 The rule goes
As a result, these cases remain pending across the on to state that the SBA Administrator in
country. The first two courts to have addressed consultation with the Treasury Secretary
contested motions to dismiss, the Northern District of “determined that the agent fee limits set forth
Florida and the Southern District of New York, have above are reasonable based upon the
dismissed the actions before them. application requirements and the fees that
lenders receive for making PPP loans.”14
Background on the Program and Agent Fees
Plaintiffs’ Claims
As mentioned, the PPP was created through an
amendment to the SBA’s Section 7(a) lending program. Plaintiffs in the agent-fee cases argue that this IFR
As a result, the existing Section 7(a) statutory and language mandates the payment of an agent fee
regulatory framework apply to PPP loans, except where regardless of whether there is an agreement between the
the CARES Act or SBA regulations have modified ————————————————————
8
program rules. The already-existing regulations 15 U.S.C. § 642 (requiring applicant to certify the identity of and
governing Section 7(a) loans allow, but do not require, fees to be paid to any agent); 13 C.F.R. § 103.5(a).
applicants to use an agent to assist in the application 9
Id.§ 103(5)(b).
process.6 Although many of the plaintiffs in these cases
10
are accountants, an agent can be any authorized 15 U.S.C. § 636(a)(36)(P)(ii).
representative of an applicant.7 If an agent is involved, 11
SBA Interim Final Rule, 85 Fed. Reg. 20811, 20812
the statute and SBA regulations require that the (Apr. 15, 2020).
———————————————————— 12
4 Lenders under the PPP program receive fees ranging from five
In re Paycheck Protection Program (PPP) Agent Fees
percent for loans of $350,000 or less to one percent for loans of
Litigation, MDL No. 2950 (J.P.M.L. Aug. 5, 2020).
$2 million or more. 15 U.S.C. § 636(a) (36)(P)(i).
5
Id. 13
SBA Interim Final Rule, 85 Fed. Reg. 20811, 20816
6
13 C.F.R. § 103.2.2. (Apr. 15, 2020).
7 14
Id. § 103.1. Id.

January 2021 Page 14
lender and the agent for payment. They further argue the lender in order to be paid. The courts reasoned that
that nothing in the CARES Act requires an agreement the CARES Act imposes a limit on what an agent can be
between an agent, customer, and lender in order for an paid, but does not mandate payment in the absence of an
agent to be entitled to payment of a portion of the fees agreement. The CARES Act’s mandate that lenders
paid on a funded loan. Although the facts vary, many “shall” be paid a fee out of the loan proceeds contrasts
complaints do not allege an express agreement with with its language limiting what agents “may” collect and
lender to be paid a fee. Some complaints allege that further evidences that Congress did not intend to
agents demanded payment unsuccessfully while others mandate payment to agents. Further, the IFR also does
make no mention of a demand or even identify the not impose a requirement to pay; it only provides that if
borrower assisted by the plaintiff agent. Plaintiffs have there is an agent fee, it must be paid out of the lender
asserted a variety of causes of action (declaratory fee. Plaintiffs pointed to various aspects of Form 159
judgment, unfair and deceptive trade claims, unjust (blanks to be completed or signatures required) as
enrichment, tortious interference, breach of implied “conflicting” with the CARES Act to argue that the form
contract, conversion), most of which are brought under is not required for PPP loans. Both courts rejected these
state law. They seek payment of agent fees, and in some arguments, essentially recognizing that just because
instances, injunctive relief to require the lender to pay Form 159 was not customized to the PPP program does
fees going forward even in the absence of an agreement. not mean that it conflicts with the CARES Act or that an
agreement is not required.
Decisions to Date
The Southern District of New York also rejected
The Northern District of Florida and the Southern arguments that because PPP was an emergency program
District of New York are the only two courts to have where speed in applying was critical, requiring that an
addressed these arguments thus far,15 and both dismissed agreement on agent fees be reached with a lender before
the claims before them, holding that the CARES Act applying was inconsistent with the program’s purpose.
does not entitle agents to be paid fees in the absence of Also unsuccessful were arguments that absent a payment
an agreement.16 Both courts analyzed the PPP-specific requirement, lenders will never agree to pay agents or
statutory and regulatory requirements in the context of borrowers will be effectively barred from using agents –
the pre-existing and more detailed Section 7(a) program thereby making it more difficult for small businesses to
requirements because they ruled that those provisions obtain PPP loans.
continue to apply in the absence of a conflict with the
PPP. Both courts looked to the plain language of the Equitable theories asserted by the plaintiff in the
CARES Act and concluded that the statute does not Northern District of Florida fared no better.
require the payment of fees in the absence of an Specifically, an unjust enrichment claim under Florida
agreement. The courts found no conflict between the law failed because agents could not allege the required
CARES Act or the IFR and the pre-existing requirement direct conferral of a benefit on the defendant. The court
that an agent enter into a compensation agreement with concluded that the agent’s work may have directly
benefitted the borrowers, but the defendants received
———————————————————— merely an “incidental benefit” of the agent’s work. The
15
Sport & Wheat, CPA, PA v. Servisfirst Bank, Inc., No. 20- Southern District of New York also rejected state law
05425, 2020 WL 4882416 (N.D. Fla. Aug, 17, 2020); Johnson claims, but primarily on the grounds that the claims were
v. JP Morgan Chase Bank, N.A., No. 20-cv-4100, 2020 WL premised on an entitlement by the agents to fees under
5608683 (S.D.N.Y. Sept. 21, 2020) (The Southern District of the PPP.17
New York consolidated six agent-fee actions pending before it
for pretrial purposes and issued a single opinion addressing all Defendants in both cases also argued that the CARES
of the cases). Act does not support a private right of action. The
16
As an initial matter, the Southern District of New York Northern District of Florida did not find it necessary to
dismissed some plaintiffs’ claims for lack of subject matter reach the implied right of action question because of its
jurisdiction because they did not plead that they ever demanded ruling on the merits. The Southern District of New York
payment from the defendant lenders. The court concluded that held that even if plaintiffs’ reading of the statute and
where a plaintiff could not establish the futility of a payment regulatory guidance was correct on the merits, there is
demand, the plaintiff lacked standing and therefore dismissal ————————————————————
17
under 12(b)(1) was proper. However, where a defendant had Johnson, No. 20-cv-4100, 2020 WL 5608683, *9-12 (rejecting
an established policy not to pay agent-fees (at least absent an third-party beneficiary contract, unjust enrichment, and
agreement to do so), the court concluded that futility of making conversion claims among others). The court also dismissed
a payment demand was established and jurisdiction was proper. state unfair trade practice claims. Id.

January 2021 Page 15
no private right of action to enforce the PPP provisions banks, however, reversed course once customers
of the CARES Act. complained. For example, one large bank changed its
policy and began approving loan applications from
Many agent fee cases remain pending and are on the borrowers who hadn’t already banked with that
cusp of, or in the midst of, briefing on motions to institution. Another major bank, however, only
dismiss. However, on December 27, 2020, President approved loans from new customers who operate
Trump signed into law H.R. 133, which states that PPP nonprofits or had fewer than 50 employees.
lenders are only required to pay agent fees for those
“which the lender directly contracts with the agent.”18 Rejected Applicants Seek Relief from Courts
Backdated to March 27, this provision does not bode
well for existing plaintiffs and likely marks an end to the Bearing the brunt of these constraints are would-be
onslaught of agent fee lawsuits. borrowers who applied for a PPP loan only to be rejected
on the grounds that the lender could only accept
UNSUCCESSFUL APPLICANT ACTIONS applications from existing customers. Those applicants
who were denied loan applications, or not even
Background permitted to apply, because they did not already bank
with a lender, have sought relief and/or clarification
One issue with the PPP Program is that the Treasury from the courts.
Department required that lenders comply with the Patriot
Act’s KYC requirements. The KYC requirements exist Only one major illustrative decision, Profiles, Inc. v.
so banks can ensure that customers do not engage in Bank of Am. Corp., has been handed down on this
money laundering activities under the guise of issue.20 In Profiles, the District of Maryland denied a
seemingly legitimate banking. To comply with KYC request for a temporary restraining order enjoining a
requirements, banks must conduct extensive due bank from denying loan applications on the basis that the
diligence on customers before they can open accounts customer did not have a pre-existing account with the
with the institution.19 The KYC requirements go beyond institution.
a “check the box” exercise, and can be burdensome and
time-consuming for banks. The court in Profiles noted that the CARES Act did
not support a private right of action under which
The incongruity between Treasury’s directive and plaintiffs could sue lenders for not complying with the
Congress’ silence on KYC requirements put both banks Act’s provisions. The court also held that lenders were
and would-be borrowers in a difficult position. Banks free to create their own eligibility requirements separate
were required to choose between speed (granting PPP from what is specified by the Act. Having lost its bid for
loans promptly) and thoroughness (making sure that a temporary restraining order and an attempt to appeal
KYC requirements are met for each borrower). that decision, the plaintiff in Profiles dismissed the case.
Applicants, on the other hand, struggled to qualify for This decision provides some flexibility and relief for
loans from institutions where the customer had not lenders, but did not make PPP loans more accessible to
already satisfied KYC protocol. customers.

Banks’ reactions to this predicament varied and In a similar lawsuit, the plaintiffs in two lawsuits filed
changed over time. Initially, in an effort to manage their in the Southern District of Texas alleged that a bank
resources and harmonize the tension between needing to improperly restricted access to PPP loans to customers
process PPP loan applications while also adhering to with a pre-existing checking account at that bank.21
KYC protocols, many banks elected only to approve Among the plaintiffs’ theories is that denying loans to
loans for existing customers, i.e., customers who have non-previous customers is profitable for the institutions
already satisfied the bank’s KYC requirements. Some

————————————————————
18
More information available at https://www.loc.gov/law/ ————————————————————
20
foreign-news/article/united-states-president-signs-law-to- Profiles, Inc. v. Bank of Am. Corp., et al., No. 1:20-cv-00894-
provide-new-economic-stimulus-to-address-pandemic- SA (D. Md.).
hardships/. 21
Scherer v. Wells Fargo Bank, N.A., No. 4:20-cv-01295
19
Available at: https://home.treasury.gov/system/files/246/ (S.D. Tex.) and Scherer v. Frost Bank, No. 4:20-cv-01297
staterule.pdf. (S.D. Tex.).

January 2021 Page 16
because they can make more substantial origination fees Among those lawsuits, one complaint goes so far to
from larger loan amounts for existing clients.22 allege that large bank PPP lenders conspired with each
other only to provide PPP loans to their existing clients
Numerous other plaintiffs filed suit asserting claims in order to protect their market share.25 Plaintiffs
that lenders failed to process PPP loan applications on a brought this action under the Sherman Act and Clayton
“first-come, first-served basis” as anticipated by the Act, and the complaint does not include any facts
SBA.23 These suits arise from the SBA’s rules, which supporting the alleged conspiracy.
state that the PPP program is a “first-come, first-serve”
program.24 However, the rules do not require lenders to While the outcome of the applicant lawsuits that
process applications on a first-come, first-serve basis. remain pending is uncertain, Profiles sets the
groundwork for courts to decline to find liability because
The alleged harm for plaintiffs bringing a claim under lenders applied their own means to achieve KYC
the “first-come, first-serve” argument is that they missed requirements or process loan applications efficiently.
the opportunity to promptly apply for loans from lenders The approach of the Northern District of Florida and the
that actually were processing loan applications on a first- Southern District of New York further point to the
come, first-served basis. The SBA’s guidance on the importance of the plain language of the CARES Act and
topic does not include a requirement that applications be IFR in applying the PPP rules to these disputes. Now
processed on a first-come, first-served basis. Other that the PPP has closed (absent further legislation), the
claims asserted in these complaints include negligence, next set of questions to be answered will likely deal with
unfair competition, promissory estoppel, and breach of the complicated rules for loan forgiveness. The SBA
fiduciary duty. The plaintiffs generally argue that the recently issued a simpler loan forgiveness application for
lenders have a duty to review all applications equally loans of $50,000 or less, and these loans account for the
and promptly, and that by prioritizing certain applicants majority of loans made.26 However, businesses that
over others, lenders have breached those duties. The borrowed more than this amount will need to navigate
plaintiffs also argue that they detrimentally relied on the fairly complex rules, and of course, if loan forgiveness
assumption that their applications would be timely applications are denied, then litigation may well
reviewed, and in doing so missed out on the opportunity follow.27 ■
to apply for loans elsewhere.

————————————————————
22
It should be noted that some banks pledged to donate any
profits from the program. See https://www.americanbanker.
com/news/heres-where-wells-fargo-is-donating-its-400m-in-
ppp-fees.
23
Outlet Tile Center v. JPMorgan Chase & Co., No. 2:20-cv-
03603 (C.D. Cal)(voluntarily dismissed); Ryan M. Kull
Licensed Clinical Social Work LLC v. Chase Bank USA, N.A.,
No. 1:20-cv-03138 (S.D.N.Y.)(voluntarily dismissed); Law
Office of Sabrina Damast, Inc., et al. v. Bank of Am. Corp., No.
2:20-cv-03591 (C.D. Cal.)(voluntarily dismissed); Legendary
Transport, LLC v. JPMorgan Chase & Co., et al., No. 2:20-cv-
03636 (C.D. Cal.); Hyde-Edwards Salon & Spa v. JPMorgan
Chase & Co., No. 3:20-cv-00762-DMS-MDD (S.D. Cal.);
————————————————————
Starwalk of Dallas, LLC v. JPMorgan Chase & Co., No. DC- 25
Legendary Transport, LLC v. JPMorgan Chase & Co., et al.,
20-05797 (Dallas Cty. Dist. Ct.); and Sha-Poppin Gourmet
No. 2:20-cv-03636 (C.D. Cal.).
Popcorn LLC v. JPMorgan Chase Bank, N.A., No. 1:20-cv-
26
02523 (N.D. Ill.). Available at: https://home.treasury.gov/news/press-releases/
24 sm1148.
SBA Interim Final Rule, 85 Fed. Reg. 20811, 20816 (Apr. 15,
27
2020); see https://www.proskauer.com/alert/first-come-first- Available at: https://www.sba.gov/document/support-
serve-paycheck-protection-program-launched-today. frequently-asked-questions-ppp-loan-forgiveness.

January 2021 Page 17
The Review of Banking & Financial Services

General Editor Associate Editor
Michael O. Finkelstein Sarah Strauss Himmelfarb

Board Members

Roland E. Brandel Robert M. Kurucza
Morrison & Foerster LLP Seward & Kissel LLP
San Francisco, CA Washington, DC

H. Rodgin Cohen Benjamin P. Saul
Sullivan & Cromwell LLP Bryan Cave Leighton Paisner LLP
New York, NY Washington, DC

Ralph C. Ferrara Morris N. Simkin
Proskauer Rose LLP New York, NY
Washington, DC
Thomas P. Vartanian
Connie M. Friesen Antonin Scalia Law School
Sidley Austin LLP at George Mason University
New York, NY Arlington, VA

Etay Katz
Allen Overy LLP
United Kingdom

January 2021 Page 18

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